Mar 11, 2005

Indian Reserve Diversification

This morning we have India keeping the ball rolling.
Reserve Bank of India governor Yaga Venugopal Reddy said on Friday that diversification of foreign exchange reserves was being discussed within the bank and it was a subject of ongoing debate amongst all central banks.
India is the sixth largest holder of dollar reserves.

While the currency markets largely ignored the news I think they are still a bit stunned by the S. Korean intervention yesterday. With all the chatter about the need to diversify and S. Korea appearing to lead the shift a few weeks ago, they stepped in last night and did the opposite. While the interventions are not sustainable in the long run, the CBs potential losses are not yet keeping them out. It is a bit like playing a winning poker hand against someone who keeps raising.

Also, notice that Japan took the same route as S. Korea claiming that diversification referred to assets and not currencies. That equates to sacrificing U.S. bonds to maintain the currency.

How this game will end is much bigger than the day-to-day news in domestic markets.

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